Nagesh Kumar: Emerging regional architecture in Asia

With a combined population of nearly half a billion and GDP of over a trillion dollars, ASEAN countries provide a large market for Indian companies.

The conclusion of India-ASEAN FTA after four years of negotiations in Singapore at the ASEAN Economic Ministers meeting last week will pave the way for India to play its due role in emerging broader regional architecture in Asia.

India had begun to engage ASEAN since 1992 as a part of the Look East Policy. Look East was perhaps a response to the growing recognition of East Asia’s potential to emerge as the centre of gravity with rapid growth sustained over the past three decades in contrast to rather subdued economic performance of the western world. It also had something to do with the rise of the economics of neighbourhood that was leading to formation of regional trade blocs all over the world from EU to Nafta to Mercosur.

As a part of the Look East, India has evolved a multifaceted partnership with ASEAN and other East Asian and Pacific countries. India was made a full dialogue partner by ASEAN in 1995 and was accorded a membership of the ASEAN Regional Forum in 1996. The ASEAN-India dialogue partnership was further upgraded to an annual Summit level dialogue from 2002. Therefore, the India-ASEAN partnership saw a remarkable transformation from a sectoral dialogue partnership to a Summit-level interaction within the decade of 1992-2002. At their Second Summit in October 2003, ASEAN and India signed a Framework Agreement on Comprehensive Economic Cooperation and began negotiating an FTA since 2004.

The India-ASEAN FTA also needs to be viewed in the broader context of global trends and longer-term strategic interests of the country. Regional or bilateral free trading arrangements (RTAs/ FTAs) have become important aspects of any country’s trade policy. Over 350 RTAs/FTAs are currently in different stages of negotiations and the bulk of world trade is now conducted within the FTAs. Therefore, any country can ignore FTAs only at its peril.

Secondly, India-ASEAN FTA is a part of the trend of ASEAN concluding FTAs with all its dialogue partners, the so-called ASEAN+1 FTAs. China was first dialogue partner to complete FTA negotiations with ASEAN. Subsequently South Korea and Japan have concluded similar agreements. With India and Australia and New Zealand also concluding negotiations, all the ASEAN+1 FTAs will be ready.

As a part of the Look East Policy, India has engaged not only ASEAN but a number of individual ASEAN countries as well as northeast Asian countries namely Japan, South Korea, China, Australia and New Zealand. India is negotiating similar pacts with Japan, South Korea and Malaysia and is studying similar arrangements with Australia, New Zealand, China and Indonesia. We have already signed a comprehensive agreement with Singapore and a partial FTA is on with Thailand.

These arrangements can be seen as important building bloc of an emerging broader regional grouping bringing together ASEAN and its dialogue partners. In that direction launch of the East Asia Summit (EAS) in Kuala Lumpur in December 2005 with leaders of 16 countries comprising ASEAN, Japan, China, South Korea, India, Australia and New Zealand is an important initiative. Bringing together 16 of Asia’s largest and most dynamic economies, EAS can provide basis for an appropriate forum for evolving broader regional architecture in Asia for regional cooperation. In January 2007 at their second session, EAS leaders launched a study of a comprehensive economic partnership arrangement of 16 countries. Bringing together Japan, China and India in a single unified market, this grouping has the potential of creating a large regional arrangement comparable to NAFTA and EU in scale but with greater dynamism than them. Hence, it could emerge as the third pole of the world economy.

Among the specific provisions of the FTA, it provides for gradual elimination of tariffs on 80 per cent of tariff lines by 2015. For an additional 10 per cent of tariff lines that are on the sensitive track, the tariffs will be brought down to 5 per cent. To protect some sensitive products like agricultural commodities, 489 items have been put on a negative list where we will not offer tariff concessions. Considering that our tariff rates on non-agricultural goods have been going down over the past years progressively and currently peak tariff rates are at 10 percent, we should be able to implement the provisions of the FTA without much problem. Most of the sensitive items will be protected through sensitive and negative lists. In addition there are safeguards such as rules of origin to ensure that third countries are not able to take advantage of the preferential trade arrangement. There will also be product specific rules for a range of products to protect manipulation of value addition norms besides standard safeguards as available in WTO agreements.

It is time that Indian industry begins to look at the market access opportunities becoming available through the FTA in ASEAN countries. With a combined population of nearly half a billion and GDP of over a trillion dollars, ASEAN countries provide a large market for Indian companies. Indian companies should deepen their penetration in these countries by taking advantage of the duty free access that will become available to us under FTA.

Yet a more important potential of the FTA will be in unleashing a process of industrial restructuring aimed to enhance the overall competitiveness by exploiting the synergies of the FTA partners for mutual advantage. Some companies will produce in India for both ASEAN and Indian markets, others may produce in ASEAN for the combined markets.

Some early patterns in deepening of investment links prompted by the FTAs are already visible. Over 2,000 Indian companies have reportedly set up bases in Singapore to expand into the east Asian region. Some large IT companies like TCS and Satyam have made Singapore as their regional headquarters. Tata Steel has acquired NatSteel of Singapore having operations in several East Asian countries, Millennium Steel in Thailand and is setting up a greenfield steel plant in Vietnam. Indian public sector companies have invested in the gas fields in Myanmar. Indian companies have invested in coal mines in Indonesia besides in automobiles among other industries with total investments of over $1 billion. ASEAN companies in infrastructure development are active in various parts of the country in construction of highways, ports, IT parks, among others. An Indonesian group is setting up a special economic zone in West Bengal. Even Japanese and South Korean companies, among other foreign multinationals, may also restructure their operations to take advantage of the FTA across the region.

Therefore, the conclusion of India-ASEAN FTA negotiations is an important event in the direction of emerging broader Asian regional architecture for regionalism.

The author is director-general, Research and Information System for Developing Countries (RIS). The views expressed here are personal. nkumar@ris.org.in.